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Trader thoughts - the long and short of it

There has been an innate and unshakable confidence in the more popular equities markets for a large segment of the buy-only crowd.

Source: Bloomberg

Wall Street enjoys a break in the building speculative storm. There has been an innate and unshakable confidence in the more popular equities markets for a large segment of the buy-only crowd. That is why benchmarks like the S&P 500 have made such remarkable progress over the years despite an otherwise lackluster outlook for growth and returns while the Fed has also capped its growing stimulus account. We’ve seen this reversion to confidence take hold through Wednesday’s session. The financial headlines did little to hearten market watchers’ forecasts with trade wars still on course, a central bank forum in Europe voicing concern over the repercussions of competitive trade policy and traditional economic data lacking heft. The Dow posted its first bullish gaps on the open in four trading days, but nevertheless marked a new low by the close of trade – setting the lowest end of day of June and the 7th straight consecutive loss. The most encouraging facet of the market for bulls at this point is the lack of panic. So long as fear doesn’t charge a need to abandon the markets before a herd, key technical levels can hold up with a wait-and-see approach restricting progress.

Pound gains as UK PM May, MPs reach Brexit compromise. BOE may help: The British Pound tracked cautiously higher after Prime Minister Theresa May and pro-EU members of her Conservative party reached a compromise on how much say MPs will have over steering the final outcome of Brexit negotiations. Ms May will retain a free hand in talks with Brussels, giving her the ability to make deals without the outright threat of a Parliamentary veto. Follow-through will depend on outcome of the Bank of England rate decision however. Governor Carney and company are broadly expected to keep the current policy mix unchanged but guidance in the companion statement as well as the MPC vote tally in the meeting minutes accompanying the release will shape speculation. A recent pickup in economic activity might inspire a slightly more assertive tone, which might merit an upshift in the expected timing of the next rate hike. That might give Sterling a more substantive lift.

Central bank forum touches policy forecasts, projects trade war concern: The final day of the ECB-hosted central banking forum in Sintra, Portugal offered up the most provocative event on the entire three-day schedule: the panel bringing together leaders of the Federal Reserve, European Central Bank, Bank of Japan and Reserve Bank of Australia. For individual monetary policy insight, the RBA and BoJ offered speculators little to work with. That comes as little surprise. Ambiguity works in their favor as the effectiveness of their efforts has been remarkably uneven. From ECB President Draghi, he echoed much of his sentiments from previous days’ remarks and from the bank itself at last week’s policy meeting. He is optimistic on the outlook for growth and inflation, but vows a turn in policy will happen extremely slowly. The Fed’s Powell offered up some of the most interesting insight when he suggested he sees further rate hikes ahead and that the current rate is perhaps 100 basis points lower than the neutral rate. Most remarkable was the collective view offered on the detrimental effects of trade wars. Considering how important monetary policy has been to driving the speculative climb over the past decade, it is worth heeding their warning.

EU tariffs to go into effect Friday, spreading the trade war front line: While much of the focus in trade wars these past weeks has been focused on the spat between the US and China specifically, it is important to remember that this engagement is not being fought on one front. The European Commission announced that its retaliation to the United States’ metals tariffs (confirmed at the start of the month) would go into effect this Friday. The taxes on 2.8 billion euros in US goods is just as important a move in the game of chicken as China’s more intense reactions. That is because there is little global clamor to label the EU an unfair trade member. Further it is the largest collective economy in the world. We have yet to see any dramatic escalation in response from US President Trump as he announced after China’s reprisal, but the threat of this mentality spreading to the core of the developed world would quickly poison the well for economic and speculative confidence.

Aussie Dollar find the loosest technical relief: On an equally-weighted basis, the Australian dollar managed to post its first bullish close in 7 trading days through Wednesday. The progress measured in this speculative check barely registered and it comes after the longest slide since December 2015, so the confidence that springs from this hold is understandably tepid. We get the same technical interpretation whether we are looking at AUD/USD, EUR/AUD, AUD/JPY or most other crosses. Equipped with lackluster data like the May leading index this past session and little of merit ahead. FX traders have to rely on headlines and themes. RBA Governor Lowe gave little reason for enthusiasm on a carry front at the central bank summit hosted by the ECB and trade wars will not have a positive spin for Australia. With some technical levels coming into view, a passive slide will need to be fueled with some greater motivation. Beware the development of clear risk based move however, this carry currency has no haven appeal to speak of.

Gold drops on hawkish shift in Fed outlook, crude oil awaits OPEC+ meeting: Gold prices fell for a fourth consecutive day, hitting the lowest level in six months. The move tracked inversely of a rise in US Treasury bond yields as the priced-in rate hike path implied in Fed Funds futures steepened. Somewhat hawkish comments from Fed Chair Jerome Powell at the ECB Forum in Sintra, Portugal as well as a broader recovery in risk appetite that bolstered confidence in the US central bank’s wherewithal to proceed with tightening seemed to drive the move. Meanwhile, crude oil prices continued to mark time as all eyes remain on the OPEC+ strategy session due to begin in Vienna on Friday. That will bring an update to the group’s coordinate production cut regime. Russia and Saudi Arabia are pushing to relax output curbs, a move opposed by other top exporters (such as Iraq).

Market Data:

SPI futures moved 70.46 or 1.15% to 6172.58.

AUD/USD moved -0.0012 or -0.16% to 0.7369.

On Wall Street: Dow Jones -0.17%, S&P 500 0.17%, Nasdaq 0.72%.

In New York: BHP 0.27%, Rio 0.22%.

In Europe: Stoxx 50 0.13%, FTSE 100 0.31%, CAC 40 -0.34%, DAX 30 0.14%.

Spot Gold moved -0.49% to US$1268.39 an ounce.

Brent Crude moved -1.17% to US$74.2 a barrel.

US Crude Oil moved 1.77% to US$66.22 a barrel.

Iron Ore moved 0.55% to CNY454.5 a tonne.

LME Aluminum moved -2.19% to US$2171 a tonne.

LME Copper moved -1.78% to US$6840 a tonne.

10-Year Bond Yield: US 2.94%, Germany 0.38%, Australia 2.65%.

Written by: Ilya Spivak, Currency Strategist and John Kicklighter, Chief Strategist with DailyFX

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